The 2020 European financial services outlook
For all financial services practitioners, 2020 will be a year of dynamic developments.
Author Laura Hodgson
The claimant, Euro Pools, specialised in the installation of swimming pools. It provided both: (i) movable floors that could be raised or lowered to change the depth of the pool, and (ii) a boom system comprising vertical walls that could be raised or lowered to divide the pool into different swimming areas. Euro Pools was insured by Royal & Sun Alliance (RSA) under an annual professional indemnity policy. The case concerned policies covering the periods June 2006 to June 2007 and June 2007 to June 2008 respectively.
In February 2007, Euro Pools discovered that the bottom of the tank used for the booms wasn’t airtight, meaning that it would not rise as it was designed to do. RSA was notified but Euro Pools said that it did not believe that it would make a claim since it had come up with a remedial solution (which involved using air bags) that would cost less than the policy excess. However, Euro Pools later encountered problems with the air bags, and in May 2008 told RSA that it wanted to change to a hydraulic system. The cost of this solution exceeded its policy excess, so Euro Pools made a claim under the mitigation costs section of the policy.
Also in February 2007, Euro Pools notified RSA about a separate “major design fault” in the movable floors system and said that it intended to change to a mechanism involving stainless steel ropes and hydraulics. Euro Pools told RSA that it wished to claim the cost of the new system under the policy.
In October 2007, the movable floor of a swimming pool in Leeds jammed. RSA was notified in November 2007 being a circumstance which might give rise to a claim. Euro Pools later made a claim for remedial works to the pool. The question that arose at trial was whether the claims for the cost of (i) the new booms system and (ii) remedying the Leeds swimming pool were covered by the 06/07 policy or the 07/08 policy.
In relation to the claim for the booms, Euro Pools argued that the relevant notification was made in May 2008 rather than the first notification in 2007. It argued that the relevant loss was the failure of the air bags, not the original tank failure that led to the air bags system, which it did not know about until after renewal. Euro Pools relied on Kajima UK Engineering Limited v The Underwriter Insurance Company Limited  EWHC 83 (TCC) on the basis that, “It is only circumstances of which the Insured is actually aware which can be the subject matter of a notification” (Akenhead J).
RSA said that the correct interpretation of Kajima was that both the initial tank failure and the later air bag failure revealed that the mechanism had problems and that accordingly, notification should have been given earlier.
Moulder J preferred Euro Pools’ submissions and found that the later failure in the system was not causally connected to earlier failure notified in February 2007. Importantly, however, even if the first failure was connected to the later failure, Euro Pools were not aware of this when their first notification was made.
Similar arguments were made in connection with the Leeds claim. Euro Pools’ case was that the failure of the swimming pool in Leeds should also be considered to have no causal connection to the notification first made in February 2007 as the failures did not relate to one another.
RSA submitted that the February 2007 notification was sufficiently general as it was worded to cover a “wide range of failures at different sites which were causing pool floors not to rise properly” to include systematic failures. The judge did not agree. The later design defect which lead to the problems in the Leeds swimming pool were not something that Euro Pools were aware of when they gave notification of the problems with the booms in February 2017 and in any case there was no causal link between the design failures in the Leeds pool and the rope system being introduced.
This decision shows the importance of getting notification requirements right – if a notification is too general it may be hard to bring specific claims later identified within the notice.
Author Laura Hodgson
Excess Loss Clauses promulgated by the Joint Excess Loss Committee are standard London market clauses. These clauses include an arbitration clause (clause 15). Clause 15 provides “Unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years’ experience of insurance or reinsurance”.
Underwriters questioned whether a QC who had practised for over ten years as a barrister specialising in insurance and reinsurance law had the requisite “experience of insurance or reinsurance”. The respondents applied to the court under the Arbitration Act 1996 to remove the QC as an arbitrator on the grounds that he lacked the relevant qualifications as he had not worked within the insurance industry.
The dispute concerned a claim by the Port of New York under its liability insurance and a following claim under the reinsurance in relation to claims made by firefighters and others involved in rescue and recovery operations following the attack on the World Trade Center in 2001.
The application by the respondents was heard by Teare J who felt bound to follow an earlier decision of the Commercial Court in Company X v Company Y (17 July 2000) in which Morison J held that a QC with over ten years’ experience acting on insurance and reinsurance disputes did not qualify for appointment. Teare J however, granted permission to appeal.
On Appeal, Leggatt LJ overruled the decision in Company X v Company Y and found that there was nothing in the language of clause 15 of the Excess Loss Clauses to limit the experience of the arbitrator to work within the insurance industry rather than legal practice.
Author Laura Hodgson
In Bluebon Limited v Ageas (UK) Limited  EWHC 3301, the High Court considered whether a term described as an Electrical Inspection Warranty was a true warranty, a suspensive warranty or merely a term in the policy requiring compliance as a condition precedent to the insurer’s liability to provide cover in respect of the risks to which the term relates (in the context, fire).
The case concerned a policy in respect of a hotel in West Lothian. The policy contained a clause which was described as an Electrical Inspection Warranty. The term was contained in a policy schedule under the heading of “Special Conditions and Endorsements”. The term stated:
“it is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation Contracting (NICEIC) and that any defects found be remedied forthwith …”
The hotel was destroyed by fire in October 2010. The insured claimed losses totalling just under £1,750,000. There was no evidence that the electrical installation had been inspected during the currency of the policy, nor in the 5 years before the policy commenced.
The insurers denied liability for the fire on the basis that there had been a breach of warranty. They maintained that the policy was void from inception and returned the premium on the basis that they had never been on risk. Insurers maintained that the Electrical Inspection Warranty was a true warranty within the meaning of section 33 of the Marine Insurance Act 1906 (MIA). In the alternative, the insurers argued that the term was a suspensive warranty under which they had no liability for the duration of breach.
The insured and its broker argued that the term was not a warranty but merely a term requiring compliance as a condition precedent to liability to provide cover in respect of risks to which the term related. On this basis the insured claimed that, given that there was no evidence that the fire was caused by the lack of inspection, the claim should be paid. The insured also argued that the Electrical Inspection Warranty required electrical testing every five years during the currency of the particular insurance, thereby not including time before the policy incepted.
Mr Justice Bryan considered the principles that should be applied citing Rainy Sky v Kookmin Bank  1 WLR 2900 and the Supreme Court decision in Arnold v Britton  AC 1619. Bryan J concluded that interpretation was a unitary exercise, and where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense.
Citing HIH Casualty & General Insurance v New Hampshire Insurance Co  2 All E.R. (Comm) 39, the court when determining whether a particular term is a warranty or not should look to the “root of the transaction”.
Accordingly, Bryan J found that the term was a warranty that the electrical installation be inspected and tested every five years, regardless of the policy term. The commercial purpose of the term was clear: to protect against fire. The term was a suspensory condition as the requirement to remedy a breach meant it could not be a true warranty within the meaning of section 33 of MIA.
Author Laura Hodgson
The UK Court of Appeal has dismissed an appeal by insurers against a decision at first instance that owners of a vessel had not lost the right to abandon a vessel and claim constructive total loss under the Marine Insurance Act 1906.
A vessel, the mv Renos was on a laden voyage in the Red Sea when a fire broke out in the engine room. The owners gave Notice of Abandonment (NOA) of the vessel to insurers and claimed that it was a constructive total loss (CTL) on the basis that the cost of repairs exceeded the insured value. Insurers maintained that the vessel was not CTL and that in any event the owners had lost the right to abandon the vessel and claim CTL. The Court of Appeal dismissed the appeal and held that:
Where project-wide cover was taken out for a construction contract for extensions to a school but the roofing contractor was obliged to take out its own insurance, it was held that the roofing contractor who caused a fire and a loss of £8.75 million was not entitled to the benefit of the project-wide insurance.
The facts are sadly familiar. Hot work was done on a roof using a blowtorch to stick down roofing membrane. A fire occurred which spread and caused extensive damage to the building. It was an express term of the roofing subcontract that the subcontractor would obtain its own third-party liability insurance cover and it did so for £5 million.
The three project insurers paid out £8.75 million and sought a subrogated recovery of the £5 million from the roofing subcontractor, essentially from its insurers who resisted the claim.
It was argued by the roofing contractor that it was entitled to cover provided by the project insurance and that therefore the project insurers had no right of subrogation against it. The court found that although it is commercially sensible for all the risks in a contract to be covered by a single insurance policy as is commonly done in a Contractors All-Risk insurance policy, where there is a specific provision in the subcontract that the subcontractor must have its own third party liability insurance, this provision overrides the subcontractor’s entitlement to the benefit of the project insurance.
The project insurers recovered the £5 million.
Author Jaime Macdonald
In Canada, many provinces have enacted consumer protection legislation that restricts the enforceability of waivers signed by consumers. Until recently, it was unclear how these statutes interacted with provincial occupiers’ liability legislation, which typically permits landowners to limit their liability to visitors through the use of waivers.
A recent decision from Ontario’s highest appellate court determined that an occupier’s ability to restrict its liability to persons entering its property under Ontario's Occupiers' Liability Act overrules the restrictions on waivers in the Consumer Protection Act (the “CPA”). This significant decision reversed the apparent trend of lower courts in Ontario to use consumer protection legislation to void otherwise enforceable waivers.
In Schnarr v Blue Mountain Resorts Limited, 2018 ONCA 313, the Ontario Court of Appeal held that the two pieces of legislation were irreconcilable in the context of occupiers who are also “suppliers” under the CPA. The court determined that one of the very purposes of the statutory occupiers’ liability regime was to provide protection to landowners in order to encourage the development of recreational activities on private property. In the absence of any evidence that the Legislature had turned its mind to the interplay of the two statutes, there was no basis to find that the CPA should supersede the occupiers’ liability regime.
The end result is that, in Ontario, occupiers can continue to rely on waivers as a means to limit their liability. While the decision does not bind other Canadian jurisdictions, it is likely to be influential across the country. The decision should provide insurers with greater certainty when underwriting risks on a wide range of commercial and not-for-profit ventures, especially those in the sports and recreation space.
Author Victoria Chalmers
A recent Victorian Supreme Court decision in Australia has confirmed that a court, when interpreting a policy of insurance, will assess the matters by reference to the ‘natural and ordinary meaning’ of the word/clause. Simple, right? But determining the ‘natural’ or ‘ordinary’ meaning of words is not always straightforward and rarely receives universal acceptance.
Guastalegname v Australian Associated Motor Insurers Ltd  VSC 420 provides a succinct summary of the principles to be applied when interpreting a policy of insurance.
The case concerned the interpretation of the soil movement exclusion in a Home Building Insurance policy. Under the policy, the insurer agreed to indemnify the policyholder in respect of loss, damage or destruction to the building caused by a number of insured events, including storm.
On Christmas Day 2011, a violent hail storm caused water to inundate the policyholder’s land and building. Water coursed around the building and pooled under and about the concrete slab. This led to ‘heave’ of the clay soil beneath the slab, causing the soil to expand and raise the slab. The raised slab lifted the walls and roof frames, causing cracking and other consequential damage to the building.
The policyholder made a claim under the policy for the cost of repairing the damage to the building. The insurer agreed that the storm caused the inundation, the consequent ‘heave’ in the soil supporting the concrete slab, and that such heave was the cause of the plaintiff’s loss and damage. However, the insurer denied liability to indemnify, on the basis of a general exclusion of liability for loss and damage to the building caused by ‘soil movement’.
In deciding this matter, the Court had to determine whether ‘heave’, which was accepted to mean the upward movement of the earth supporting a building because of the expansion of clay soil, fell within the ‘natural and ordinary meaning’ of the soil movement exclusion.
The exclusion stipulated that there was no cover for:
“damage, loss, cost or liability caused by or arising from or involving:
The Court determined it necessary to construe the relevant provisions of the policy in accordance with the general principles to be applied in giving commercial contracts a businesslike interpretation. The Court approached the task on the assumption that the parties intended to produce a commercial result and, accordingly, a commercial contract is to be construed so as to avoid “making commercial nonsense or working commercial inconvenience” (Electricity Generation Corporation v Woodside Energy Ltd (2014) 241 CLR 640).
The Court considered what reasonable persons in the position of the parties would have understood the words to mean by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose or object of the transaction. To the extent of any ambiguity, the Court adopted a common sense and non-technical approach and sought to give the agreement a commercially sensible construction.
As regards ‘heave’ and ‘soil movement’, the Court concluded that considering the policy as a whole, there was no reasonable basis for concluding that the parties intended the soil movement to have the limited meaning as proposed by the policyholder, and although the soil movement exclusion was badly drafted, it was clear that the insurer intended to exclude indemnity for building damage caused by soil movement of whatever kind.
Therefore, the Court concluded that the natural and ordinary meaning of the soil movement exclusion was that damage to the building caused by any kind of soil movement is excluded. “Heave” was found to fall within the natural and ordinary meaning of the soil movement exclusion and the insurer had reasonable grounds to rely upon the exclusion to decline indemnity for the rectification costs claimed by the policyholder.
This case provides insureds and insurance lawyers alike with a succinct summary (and a helpful refresher) on the principles that are to be applied when interpreting a policy of insurance, and confirms that in the end, the natural and ordinary meaning of a word is still the key to policy interpretation.
For all financial services practitioners, 2020 will be a year of dynamic developments.
In the 1990s and 2000s, as everything from banking to buying books moved online, “brick and mortar” businesses were suddenly required to have an online presence and to design new business processes to accommodate the new online world.